The Board of Alaska Permanent Wants Reforms

Many factors have put the sovereign wealth fund’s distribution account in a precarious position.


Illustration by II

The capital that the $77.4 billion Alaska Permanent Fund uses to pay state residents dividends is at historically low levels. The fund’s board wants to change that.

In a recently published paper, the board lays out a plan to combine the sovereign fund’s two pools of capital and to limit distributions to residents, similar to an endowment-style model of portfolio management.

“Within the world of sovereign wealth funds, the Alaska Permanent Fund is admired and respected for its long tradition of rules-based policymaking, prudent investment management, and sound governance,” said Malan Rietveld, a fellow at Columbia University, who wrote the paper. The board hired Rietveld to review the fund’s operations.

He added: “That said, our paper shows that the current two-account structure introduces significant risks to the ability to fund the annual [percent of market value] transfer that supports the state budget and the permanent fund dividend.”

APFC operates with two pools of capital: the principal or corpus, which receives new capital from mineral royalties and government appropriations, and the earnings reserve account. This account collects capital gains, net interest, rents, and dividends. The ERA is the only account from which Alaska pulls money for its annual dividend payments to residents.

Although members of the board have long been concerned about this structure, their worries rose recently, as they saw the effects of a new payout mechanism introduced in 2019. That year, APFC made it so that payouts were based on the market value (POMV) of the ERA pool.


The immediate effect was a jump in distributions to state residents — and a depletion of the ERA pool’s assets.

In recent years, the legislature, which makes payments to the ERA pool to adjust for inflation, has not provided such capital at regular intervals. Instead, the legislative body has made periodic “catch-up” payments, leaving the ERA pool with lumpy cash flows and uncertainty.

It’s important to note that the capital in both pools is invested via a single portfolio. There are not separate allocations for each. As such, chief investment officer Marcus Frampton, applies the same approach to investment management to both pools.

Regardless of the returns Frampton can generate, though, APFC is operating in a challenging environment. Not only do the dual pools of capital and increased distributions present obstacles for the fund to overcome, but higher inflation and a looming potential recession impact the portfolio.

In addition, much of the capital supplied to APFC comes via the state’s oil reserves. As climate change and net zero 2050 promises loom, the fund expects to generate less capital from these assets.

Using scenario analysis, the researchers found that if APFC’s returns are flat from 2025 through 2027, the ERA pool will be completely depleted. Other simulations showed that there is a 5.4 percent chance that this pool of capital will be depleted by 2026, and a 20 percent chance of depletion at least once over the next ten years.

“The paper outlines reforms that should be pursued with urgency to ensure that the fund continues to underpin the sustainability of Alaska’s public finances for current and future generations,” Rietveld said.

The board is seeking a constitutional amendment to create a single account for all the fund’s assets. The board also wants the amendment to limit the fund’s annual distributions to the long-term average real return of the portfolio.

This is a “permanent endowment model,” according to the paper. This approach to portfolio management would be more flexible than what APFC is currently using, but it allows for allocations to more illiquid investments.

“Elmer Rasmuson, the first chairman of the board of trustees of the Alaska Permanent Fund, memorably described inflation as ‘a thief in the night’ that raids the real purchasing power of money,” the paper said. “Unless spending or withdrawals are linked to the average long-term real return of a portfolio, the real value of a fund’s capital value is not preserved over time.”

Barring a state constitutional amendment, though, APFC’s board believes that there is still an opportunity for change. The state could, for instance, create a buffer in the ERA balance, ensuring that it doesn’t drop to zero.

What the board wants to avoid, ultimately, is the forced selling of public equities and bonds in its investment portfolios. This would be costly, both in terms of missing out on returns and with respect to transaction fees.